Economists React: China’s Mixed Manufacturing Picture

Two indicators of Chinese manufacturing activity pointed in different directions in July, sending mixed messages as the world’s second-largest economy continues to slow. The official China Purchasing Managers Index came in at 50.3, up slightly from 50.1 in June and higher than economists expected. But a rival index produced by HSBC, which puts more emphasis on smaller export-oriented companies, fell to 47.7, an 11-month low. A number above 50 indicates an expansion in activity while a number below indicates contraction. Analysts weigh in:

We believe this divergence reflects the high level of uncertainty over China’s growth outlook, although it is unclear why it emerged. The HSBC PMI tends to cover more exporters and smaller firms, but this difference in sample cannot explain it as both the HSBC and official PMI show domestic demand seeming to slow more than external demand and the small firm subcomponent in the official PMI showed an improvement to 49.4 from 48.9 in June…The rise in the official PMI is puzzling given the liquidity squeeze and the sharp declines in total social financing (TSF) and M2 growth in June. We believe this reading makes it less likely that the government will loosen monetary policy, but we maintain our view that growth will likely slow to 7.4% in the third quarter, 7.2% in the fourth quarter and 6.9% in 2014. – Zhiwei Zhang, Nomura

The positive reading of the official PMI could be read as a tentative sign of improvement of industrial growth, as the recent indication of policy support helped to improve sentiment. The increase in new export order index points to possible improvement in exports as well. Policymakers tend to pay more attention to the official PMI and the latest reading will likely be seen as a temporary relief in terms of downward growth pressures. Whether hard data especially IP will come in line with the official PMI remains to be seen. The contrast between the official PMI and HSBC PMI may reflect the different operational environment of small- and medium sized enterprises (SMEs) vs. large companies: SMEs –which HSBC PMI focuses on – might be facing a harder time amid tighter liquidity conditions since May and the stepped up clamp down on heavy polluters and small producers in sectors viewed as having over capacity issues. – Yu Song, Li Cui, MK Tang, Goldman Sachs

The higher (official) PMI may reflect some policy measures geared towards large enterprises. It doesn’t change our overall assessment of the deteriorating economy, although the market may react positively…As the Chinese authorities appear committed to delivering a 7.5% growth target this year, both monetary and fiscal policies will have to become more accommodative and proactive in order to steer the economy to a modest cyclical rebound. While a mini fiscal stimulus is under way, we believe the People’s Bank of China must do its part to support the real economy by lowering funding costs…China pledged to reduce the overcapacity in heavy industries, which could further drag down economic growth in the next few quarters. To prevent the economy from sliding further, the government is expected to launch more favorable policies to support emerging industries and small and medium-sized enterprises. – Li-Gang Liu and Zhou Hao, ANZ

We believe today’s official PMI reading is quite positive to market sentiment. We are confident in maintaining our above-consensus 7.5% year-on-year growth forecast for the second half of 2013…Premier Li Keqiang has made it very clear that his government will try to achieve a 7.5% growth target with some policy easing measures, including more investment in infrastructure. So the official PMI survey, which was conducted late July, could have been impacted by the more positive sentiment. The HSBC PMI sample is overly represented by small exporters, which were hit by rising RMB, rising wage and sluggish global demand…In our view, at this moment we should surely focus on the official PMI simply instead of the HSBC PMI because exports now only contribute 10% of China’s GDP…With the interbank turmoil now behind us and Premier Li committed to delivering the 7.5% growth target in 2013 and an average 7.0% growth before 2020, sentiment and growth outlook have been improved. – Ting Lu, Xiaojia Zhi and Robbie, Bank of America-Merrill Lynch

The July manufacturing PMI readings are overall quite mixed, and point at uncertainties in near term growth outlook…Policy uncertainty is a major driver of market sentiment and economic activities in China. Especially in recent months, events such as the interbank liquidity crunch in June, the confusion on China’s growth target, and lack of details on policy actions to be taken given “no stimulus will be introduced,” have intensified market concerns. In the past few weeks, the State Council working conference and the Politburo mid-year conference attempted to restore market confidence via clarification on economic policies. – Haibin Zhu, J.P. Morgan

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